Overview of Small Cap Funds in India

 

 What is a small-cap fund & why consider one

  • Small-cap funds in India invest primarily in companies with smaller market capitalization (e.g., companies ranked below the top 250 in market-cap) and hence higher growth potential but also higher risk. BlinkX+2Personal FN+2

  • According to one source: “Small-Cap fund … are the top performing category of 2024 … average returns ~ 27.7% in the year”. Personal FN

  • As a category, they have delivered very high 5-yr returns in many cases (30%+ p.a) but with big volatility. For example: one list shows 5-yr returns of ~29-35% for top small-cap funds. mint+2My SIP Online+2

  • They are more suitable for investors with long horizons (7-10 years or more) and who can tolerate large drawdowns and volatility.

Key criteria when selecting a small-cap fund

When you evaluate such funds, check:

  • 5-yr (and 3-yr) CAGR – how the fund has grown over multiple years (not just 1 year).

  • Expense ratio – lower is better, especially in smaller caps where costs/research matter.

  • AUM (size of the fund) – sometimes very large size reduces flexibility in smaller stocks.

  • Fund manager / team credentials – small caps often require deep research and good judgement.

  • Risk/volatility / drawdown history – because the ups and downs are bigger.

  • Alignment with your horizon & portfolio – if you already own lots of large-cap funds, adding one good small-cap may improve diversification, but you must be ready for risk.

Some of the “best” small-cap funds (India, 2025)

Here are several small-cap funds that appear frequently in “top lists” with strong past performance:

  • Quant Small Cap Fund – Extremely high 5-yr CAGR in some lists (~40%+). Angel One+2Groww+2

  • Nippon India Small Cap Fund – Large AUM, strong track record of 30%+ 5-yr returns. mint

  • Tata Small Cap Fund – Another fund with 30%+ 5-yr returns in several lists. The Financial Express+1

  • Bandhan Small Cap Fund – Listed among top small cap funds delivering ~32% CAGR 5-yr. The Financial Express+1

  • HDFC Small Cap Fund – Also features in lists of strong small cap funds. mint+1

Important caveats & risk warnings

  • Past performance is not a guarantee of future results. The small-cap segment can go through extended weak phases. For example some funds show negative 1-yr returns even though 5-yr returns have been strong. The Financial Express

  • Volatility: Because the underlying stocks are smaller, liquidity is lower, companies are riskier. If markets turn, small-caps may fall harder.

  • Fund size scaling: Very large AUM in a small-cap fund may reduce the ability to invest in truly small companies (which often have less capacity).

  • Alignment with your portfolio: If you already have exposure to large/mid cap, adding a small-cap fund increases risk. You should set an allocation you are comfortable with.

  • Long horizon: These are better suited for 7-10+ years horizon rather than 1-2 years.

  • Expense ratio & direct vs regular plan: Choose Direct Plan if you are investing yourself (lower cost).

  • Benchmark & category changes: Make sure you check the scheme’s category, how “small-cap” is defined (the regulator changed definitions recently).

  • Tax and exit implications: Equity funds in India have tax implications (e.g., long term capital gains rules) — check with a tax advisor.

  • Monitor portfolio: Even good funds may drift or have changes in management, so periodic review is wise.

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